HAVE WE MOVED INTO AN ERA OF HIGHER INFLATION?

06.09.2023 Annual UK inflation peaked at 11.1% last year. Below we look at whether we have moved into an era of higher inflation.

From 1990 to 2020 the world enjoyed 30 years of disinflation as globalisation and digital disruption of successive sectors by the internet bore down on inflation. Going forward the medium-term outlook for inflation is more nuanced.

Deglobalisation, triggered by a desire to have more resilient supply chains will have some upward impact on inflation. Multinational companies seem to be moving to a series of regional supply chains, so that production is much closer to the underlying customers. The gradual ageing of the global population is likely to tip wage bargaining more in favour of the employee and so could raise labour costs. Finally, it seems reasonable to expect global warming to have some impact on inflation, initially via higher food prices as the amount of viable agricultural land falls.

However, offsetting these pressures pushing up inflation is the advent of Artificial Intelligence. The Generative AI large language models represent a step change in what computers are capable of. Our expectation is that Artificial Intelligence will gradually take over an increasing amount of grunt work that humans currently perform. This is likely to put downward pressure on costs and prices across a whole range of industries.  The economic impact of this is potentially highly significant. For example, Goldman Sachs estimates that it could add 7% to global output in the next decade. For advanced service orientated economies, like the UK, the impact could be quite a bit more than that. The slowdown in growth in China will also act as a deflationary force via weaker commodity prices and excess capacity. A falling population and the deglobalisation of manufacturing production suggest the era of double-digit Chinese growth rates is well and truly over.

Taking all of the above into account my best guess is that we will see low to moderate inflation over the next decade. So, today’s high inflation rates are unlikely to require a wholesale re-pricing of financial assets.

For information only. Investors should seek professional advice for their own circumstances before making an investment.

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This post was written by Robin